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FOR IMMEDIATE RELEASE
OLDWICK - SEPTEMBER 12, 2019 09:48 AM (EDT)
AM Best has downgraded the Financial Strength Rating (FSR) to A (Excellent) from A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) to “a+” from “aa-” of the U.S. life/health subsidiaries of Aegon N.V. (Aegon) (Netherlands) [NYSE: AEG]. Aegon’s U.S. life/health companies are referred to collectively as Aegon USA Group (Aegon USA). The outlook of these Credit Ratings (ratings) has been revised to stable from negative. (See below for a detailed list of these companies.)
The ratings reflect Aegon USA’s balance sheet strength, which AM Best categorizes as very strong, as well as its adequate operating performance, favorable business profile and appropriate enterprise risk management.
The downgrades reflect a deterioration in AM Best’s assessment of Aegon’s consolidated operating performance. AM Best specifically notes that Aegon’s operating performance has been characterized by relatively flat top-line trends, together with returns on equity that do not compare favorably with its similarly-rated European peers.
The ratings of Aegon USA reflect that its U.S. operations maintain the strongest level of risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), although the quality of capital is diminished from the historical reliance on special purpose captives to finance reserves generated from term life and universal life insurance with secondary guarantees. Aegon USA has additional access to liquidity as a member of the Federal Home Loan Banks, which together with its access to capital markets provides Aegon USA with substantial financial flexibility. While the asset allocation within Aegon USA’s investment portfolio is typical for the U.S. life industry, there is some continued exposure to higher risk assets.
Current year operating performance was affected by lower fee revenue due to declining equity markets along with unfavorable mortality experience and adverse persistency, but offset by aggressive expense reductions. The ratings also reflect Aegon USA’s continued profitability with good margins on new business.
Aegon USA’s product lines contribute to the company’s diversified earnings, including traditional life, variable life, variable annuities, mutual funds, pensions and accident and health insurance. While there is some volatility in Aegon USA’s operating performance, the U.S. entities maintain an underlying trend of profitability on both a statutory and IFRS basis. In addition, the organization’s increasing exposure to variable annuities exposes its earnings to volatility, and while hedged, Aegon USA’s earnings remain somewhat correlated to capital market performance. AM Best notes that overall top-line growth has been inconsistent, with direct premium declining in each of the past three years, even though ordinary life insurance premiums have grown modestly in the same period. Additionally, returns on equity have been generally in line with industry averages, albeit with some volatility. Aegon USA’s business profile continues to remain favorable, with competitive market positions in the U.S. life and annuity arenas, supported by a large and diversified distribution system and an integrated worksite strategy that leverages the group’s broad market presence.
There has been increasing commercial momentum in the United States, with some new business expense strain from the individual life business, along with a challenging market environment in employee benefits. AM Best notes that the company has made a strategic shift to focus more heavily on fee-based products, especially variable annuities, and has de-emphasized spread-based products, particularly fixed annuities. However, AM Best views variable annuities with living benefit riders as displaying some of the highest risk characteristics, as well as being vulnerable to tail risks, which could lead to an increase in required capital. Although the portfolio includes some products viewed as less creditworthy by AM Best, Aegon USA enjoys good diversification geographically and by product type.
The FSR has been downgraded to A (Excellent) from A+ (Superior) and the Long-Term ICRs have been downgraded to “a+” from “aa-” for the following members of the Aegon USA Group:
This press release relates to Credit Ratings that have been published on AM Best’s website. For all rating information relating to the release and pertinent disclosures, including details of the office responsible for issuing each of the individual ratings referenced in this release, please see AM Best’s Recent Rating Activity web page. For additional information regarding the use and limitations of Credit Rating opinions, please view Understanding Best’s Credit Ratings. For information on the proper media use of Best’s Credit Ratings and AM Best press releases, please view Guide for Media - Proper Use of Best’s Credit Ratings and AM Best Rating Action Press Releases.
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